What is the difference between Credit Card and Debit Card?
04 Dec 2019
India has been witnessing a strong uptake on cashless payments in recent years, and that includes the use of debit and credit cards. In fact, the credit cards in circulation touched 48.9 million in May 2019, according to data from the Reserve Bank of India. This is a steep rise from 38.6 million credit cards that were in circulation in May 2018. This is a growth of 27%, and it comes for a reason. People are identifying the convenience of cashless payments. But that is not it. The popularity of credit cards also points to an increasing number of retail borrowers. People are now more comfortable with the idea of buying on credit, the principle of ‘buy now, pay later’ that the credit cards operate on. The fact that people are warming up to credit cards as instruments of credit and instruments of payment is also reflected in the sheer value of transactions that have taken place over credit cards. In the financial year 2018-19, transactions done using credit cards amounted to Rs. 6 lakh crore, whereas the same number stood at Rs. 4.6 lakh in the previous financial year 2017-18. It is evident that there has been a 30% jump here as well.
Why are these figures important? This is because these numbers reflect the growing acceptance of cards as instruments of payment. Numbers are also strong for debit cards, alongside credit cards: the number of credit card transactions at POS terminals or swipe machines stood at 141.3 million, which means it saw a growth of 23.2% year-on-year. The same number stood at 347.2 million, establishing year-on-year growth of 22.8% for debit cards as of February 2019.
The larger trend is that debit and credit cards are now fairly regular modes of payment - they both eliminate the need to carry cash everywhere. You can now just swipe the card and voila, the payment is done. However, the two are very different in their features and operation, the key difference being the process and implications of the money deduction that takes place whenever you make a payment or a purchase. Let us explore this in detail:
What is a debit card?
Debit cards are plastic cards issued by banks against your current or savings account that allows you to spend the amount of money contained in your bank account, what we call the bank balance. This also implies that you can only spend up to the amount actually available in your bank account. The moment you withdraw money from an ATM machine or swipe the debit card at a POS machine or use your debit card credentials to shop online, the amount gets debited directly from your account that very moment.
Debit card works great as a cashless mode of payment, however, in times of emergencies, it cannot provide this service if you do not have sufficient balance in your account.
What is a credit card?
In contrast, a credit card functions on the principle of ‘buy now, pay later’. For every credit card, there is a predefined limit. You can borrow funds up to that limit. This means that you can use your credit card to swipe at POS or transact online as long as you are operating within this limit. You will only need to repay the amount later, within a stipulated time frame, after which the limit is back up for you to start spending again.
This pre-approved credit limit made available for you depends on your credit history, credit score, age, income etc. You only have to pay interest on the outstanding amount when and if you delay the payment.
Credit cards come with reward points, cashback and discounts, offers etc. One of the best options available to you is the Bajaj Finserv RBL Bank credit card available on Finserv MARKETS. It offers interest-free loan, cash withdrawals, no cost EMI conversions, and other benefits.
Differences between debit and credit card
The source of funds for a debit cards to draw into is your savings bank account or current account, while a credit card gives you access to money that you may otherwise not have.
You can spend only as much as you have in case of a debit card, whereas a credit card allows you to spend more than you have.
Debit card transactions take place immediately, so no bill is involved, whereas credit card accumulates all the transactions to form a bill to be paid by you within a stipulated time period.
Credit cards often come with various privileges and offers including cashback, air miles, and reward points, dining privileges etc.